Question

Onslow Co. purchases a used machine for $178,000 cash on January 2 and readies it for use the next day at a $2,840 cost. On January 3, it is installed on a required operating platform costing $1,160, and it is further readied for operations. The company predicts the machine will be used for six years and have a $14,000 salvage value. Depreciation is to be charged on a straight-line basis. On December 31, at the end of its fifth year in operations, it is disposed of. 2. Prepare journal entries to record depreciation of the machine at December 31.

Answer 1

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Onslow Co. purchases a used machine for $178,000 cash on January 2 and readies it for use the next day at a $2,840 cost. On January 3, it is installed on a required operating platform costing $1,160, and it is further readied for operations. The company predicts the machine will be used for six years and have a $14,000 salvage value. Depreciation is to be charged on a straight-line basis. On December 31, at the end of its fifth year in operations, it is disposed of.

Required:

1. Prepare journal entries to record the machine's purchase and the costs to ready and install it. Cash is paid for all costs incurred.

2. Prepare journal entries to record depreciation of the machine at December 31 of (a) its first year in operations and (b) the year of its disposal.

3. Prepare journal entries to record the machine's disposal under each of the following separate assumptions: (a) it is sold for $15,000 cash; (b) it is sold for $50,000 cash; and (c) it is destroyed in a fire and the insurance company pays $30,000 cash to settle the loss claim.

Answer:

Required 1

January 2

Machine $178,000 (debit)

Cash $178,000 (credit)

Purchase Cost

January 3

Machine $2,840 (debit)

Cash $2,840  (credit)

Readiness Costs

January 3

Machine $1,160 (debit)

Cash $1,160 (credit)

Operating Platform

Required 2

a. $28,000

b. $28,000

Required 3

a. it is sold for $15,000 cash

Cash $15,000 (debit)

Profit and Loss $27,000 (debit)

Accumulated Depreciation $140,000 (debit)

Machine $182,000 (credit)

b. it is sold for $50,000 cash

Cash $50,000 (debit)

Accumulated Depreciation $140,000 (debit)

Machine $182,000 (credit)

Profit and Loss $8,000 (credit)

c. insurance company pays $30,000 cash to settle the loss claim

Cash $30,000 (debit)

Profit and Loss $12,000 (debit)

Accumulated Depreciation $140,000 (debit)

Machine $182,000 (credit)

Explanation:

Required 1

Cost of Asset = Purchase Cost + Costs directly attributed to place the assets in location and condition intended for operation by management.

Thus, Cost of Asset = $178,000 + $2,840 + $1,160

                                = $182,000

Required 2

Depreciation Expense(Straight line) = (Cost - Residual Value) ÷ Useful Life

Straight line charges a fixed amount of depreciation.

Thus, depreciation charge each year will be :

Depreciation Expense(Straight line) = ($182,000 - $14,000) ÷ 6

                                                           = $28,000

Required 3

On Disposal of Asset, the following must the remembered ;

1. Derecognize the Cost of Asset
2. Derecognize the Accumulated Depreciation
3. Recognize the Proceeds on Disposal (if any)
4. Recognize the Profit or Loss on Disposal